Luckily, with the advent of blockchain technology, RWAs can be represented by digital tokens (or tokenized) on the blockchain, eliminating many of these problems.

What’s more, RWAs can be used on-chain and integrated into DeFi ecosystems for various purposes: trading, borrowing, lending, staking, and as collateral for various protocols. This ultimately opens many new opportunities for asset owners, borrowers, lenders, and investors to access liquidity, diversify their portfolios, earn yield, and participate in the DeFi ecosystem and economy.

How Are Tokenized Real-World Assets Used In Asset Management?

Asset management is the management of various investments such as stocks, bonds, and real estate. Intent on increasing wealth, asset management aims to maximize returns while minimizing risk.

Many asset classes have traditionally been restricted to high-net-worth individuals and institutional investors owing to high barriers to entry and the complex nature of the investing industry.

This is changing with blockchain, as it’s now possible to “tokenize” or represent these assets on-chain with digital tokens. Known as security tokens, tokens representing financial securities bring many opportunities for issuers and investors.

For example, security tokens enable fractional ownership, allowing investors to invest in only a fraction of an asset instead of the entire thing. As a result, smaller investors can participate in historically elusive and high-value assets like real estate or art.

Reasons To Use Tokenized Real-World Assets For Asset Management

One just mentioned is increasing liquidity in the market by enabling fractional ownership and trading of assets that were previously illiquid. This also leads to greater price discovery, fair valuation, and a more efficient market.

Another reason is to automate the investment process via the use of smart contracts. Smart contracts are self-executing programs or protocols on the blockchain and can be used to automate asset transfers based on predefined criteria. This leads to greater efficiency, faster transactions, and significantly reduced cost and error.

Finally, security tokens bring transparency to the asset management industry. Public blockchains are immutable public ledgers providing all parties – whether investors, issuers, asset owners, auditors, or regulators – with real-time access to information about assets, their performance data, and their ownership.

Industries That Benefit From Real-World Assets In Asset Management

Any asset class can benefit from tokenizing real-world assets in asset management. Still, certain industries stand to be radically transformed, such as:

Real Estate

These benefits combined, tokenized real estate brings increased efficiency, transparency, and liquidity to real estate markets white reducing costs, operational time, and complexity.

Art

Art is another illiquid asset class that has historically been accessible only to ultra-wealthy collectors and institutions.

Tokens which represent art investments such as the Picasso painting are sometimes dubbed Art Security Tokens (ASTs).

Ultimately, ASTs enable the democratization of art ownership and appreciation, as anyone can buy and sell fractions of expensive art on secondary markets. For investors, this results in increased portfolio diversification and exposure to a previously exclusive asset class; for asset owners and issuers, this leads to a wider investor base and improved liquidity.

For artists and creators, tokenizing art can also be a way to raise funds for their work and retain a stake in its future value. Tokenization also improves transparency in the art market, as blockchain provides an immutable record of ownership and transaction history.

Commodities

Another asset class prime for tokenization in asset management is commodities, which are physical goods such as precious metals (e.g. gold) and agricultural products (e.g. oil).

Commodities are often subject to price fluctuations from factors such as supply and demand, geopolitical events, environmental factors, and other market forces. As a result, commodities trading can be complex and risky, and requires specialized knowledge and infrastructure. 

Commodities can be expensive or difficult to deal with in terms of delivery, storage, and maintenance. This makes them tricky and often expensive investments. However, fractional ownership via tokenization allows for trading of commodities in smaller units and ultimately the sharing of these burdens between multiple investors.

As with real estate and art, tokenization also brings advantages to the commodities market such as better transparency, increased liquidity, improved efficiency, reduced costs, wider access, and enhanced security. These advantages can help to eliminate many of the difficulties faced by the commodities market and bring to it  more activity and depth.

What Benefits Do Tokenized Real-World Assets Offer Over Traditional Asset Management?

Impact On The Financial Industry

Leveraging the power of blockchain technology, RWAs will have a transformative impact on DeFi by offering yields that are sustainable, reliable, and backed by traditional asset classes. RWAs can also expand the pool of capital available for DeFi protocols and projects, as well as diversify the risk and return profiles of DeFi investors.

But it’s not just about DeFi! RWAs will also have a significant impact on traditional finance (TradFi) by increasing the liquidity, transparency, efficiency, and accessibility of the financial system.

This number is expected to grow immensely as more and more RWAs are tokenized on the blockchain. Boston Consulting Group estimates that the value of tokenized real-world assets could reach $16 trillion USD by 2030.

Overall, the coming years will be huge for RWA tokenization as more solutions and standards emerge to address the existing challenges and opportunities of the asset management market.